RAPID ASSESSMENT OF VALUE CHAIN OPPORTUNITIES IN ARMENIA

Transcription

1 RAPID ASSESSMENT OF VALUE CHAIN OPPORTUNITIES IN ARMENIA DISCLAIMER The authors views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

2 Table of Contents Acronyms... i Background... 1 Value Chains and Sectors... 1 I. Agriculture Sector Overview... 1 A. Food Processors... 3 B. Cut Flowers... 6 C. Dairy and Cheese... 8 D. Fish and Fish Processing E. Dried Foods F. Wine and Brandy G. Textiles and Apparel II. Sector Summaries A. Clean technology B. Meat and meat processing Annex A: Summary of Primary Constraints A. Weak Business Sophistication B. Understanding of end market C. Quality, Grades and Standards Annex B: Sources Annex C: Persons Interviewed Annex E: Summary of Associations Annex F: Related Activities, Republic of Armenia and other Donors Small and Medium Entrepreneurship Development National Committee of Armenia (SME DNC) National Competitiveness Foundation of Armenia (NCFA) The Armenian Development Agency (ADA) European Bank for Reconstruction and Development (EBRD) EBRD Business Advisory Services (BAS) Program United Nations Industrial Development Organization (UNIDO) Center for Agribusiness and Rural Development (CARD), US. Department of Agriculture (USDA) Millennium Challenge Account ACDI/VOCA Water to Market ProSME (GTZ) World Bank KfW European Commission (EC)... 33

3 Acronyms ADA ASME BSP CAPS CARD CEEP CIS COP EBRD BAS FAA GDP GCR HACCP IFAD ISO MAP MCA MEASURE RA SME SME DNC SPS UMCOR UPOV USAID USDA USSR Armenia Development Agency Armenian Small and Medium Enterprise project Business Services Provider Competitive Armenian Private Sector project Center for Agribusiness and Rural Development Center for Evaluation and Education Policy Commonwealth of Independent States Chief of Party European Bank for Reconstruction and Development Business Advisory Services program Federation of Agricultural Associations Gross Domestic Product Global Competitiveness Report Hazard Analysis and Critical Control Points International Fund for Agricultural Development International Standards Organization Marketing Assistance Program Millennium Challenge Account Enterprise Development Diagnostic Republic of Armenia Small and Medium Enterprise Small and Medium Entrepreneurship Development National Center Sanitary and Phyto-Sanitary United Methodist Committee on Relief Union for the Protection of New Varieties of Plants U.S. Agency for International Development U.S. Department of Agriculture Union of Soviet Socialist Republics i

4 Background Section one provides an overview of the Agriculture sector in Armenia, highlighting constraints that affect related subsectors and summarizes seven value chains. Section two provides short summaries of two additional sectors. Annexes provide additional information including a summary of constraints, outline other donor activities and provide an overview of industry associations. Value Chains and Sectors Objective: Conduct a rapid assessment of value chain opportunities in Armenia for potential support by the United States Agency for International Development (USAID). This assessment also identifies specific strengths of associations and the stakeholders that were interviewed. The Armenia business sectors are dominated by vertically integrated businesses and fragmented weak value chains. The few value chains that exist link the marzes (or provinces) to the markets based in Yerevan and are related to the food processing and tourism sectors. All require in depth analysis to determine the structure, stakeholders, enabling environment conditions and export demand. Approach: This report begins with a general assessment of the agriculture sector, which provides the background for many of the constraints outlined in the specific agriculture related value chains. The value chains addressed are: food processing, fish and fish processing, dairy, cut flowers, dried fruit, wine and brandy, and textiles. Brief sector summaries are provided for meat and meat processing, and clean technology. Analysis of the tourism and Information Technology (IT) sectors has not been included in this report because the current USAID Competitiveness Project has already conducted extensive analyses of these sectors. Information provided draws on secondary resources from existing and previous donor assistance activities, and primary sources consisting of interviews with sector stakeholders, donors, and Republic of Armenia (RA) agencies. Reports, sector assessments, market surveys from the USAID Armenian Small and Medium Enterprise (ASME) project were key reference documents, as was the 2004 Competitiveness Assessment. Interviews were conducted with trade associations, individual businesses, RA agencies and programs, and other donor activities. Criteria reviewed: The general overview of each value chain includes estimates on percent of Gross Domestic Product (GDP), percent of employment, percent of the domestic and export market, number of companies, products and production capacity, primary stakeholders, and constraints. A summary of primary constraints across value chains is provided at the end of this assessment. I. Agriculture Sector Overview The contribution of agriculture to the Armenian GDP has been around 20 percent since Current employment in agriculture represents 47 percent of the labor force. 1 The agriculture 1 National Statistical Service of RA: Statistical Yearbook This includes dairy and meat subsectors. 1

5 sector reviewed by this assessment includes value chains for food processing, dairy, fish and fish processing, dried fruit and cut flowers. Armenia produces a wide variety of fruits and vegetables. Notable products are apricots, peaches, pears, grapes, tomatoes, and potatoes. Officially there are 338,000 farming households registered. However, ACDI/VOCA believes the actual number of functioning farms is much lower around 200,000. Of this 200,000, approximately 100,000 are subsistence farmers. While this is a large number of registered land holders, farm sizes are small. Privatization of land following independence resulted in the distribution of holdings that are too small and spread out to allow for economies of scale for most agricultural products. The average farm size is 1.4 hectares. Large farms with more than 10 hectares currently represent only 6 percent of all farms. 2 ACDI/VOCA estimates that there are approximately 20,000-30,000 farms with at least 3-5 hectares per farmer; farms of this size can be targeted to produce highvalue horticulture products. Food and agricultural exports account for approximately 10 percent of all exports, with the primary markets being Russia and the Commonwealth of Independent States (CIS) 3 (meats, dairy products, fresh vegetables, spirits), EU-15 countries (fish, canned fruits and vegetables, spirits), and Georgia (all types of agri-food exports). Fresh food products, which include exports of eggs, fruits, vegetables and fish, account for the majority of the value of total food and agricultural exports from Armenia. 4 Given the size and number of small holdings, the organization of the farm sector is relatively weak. The farm cooperative movement is gaining momentum in Armenia, having received support from the United States Department of Agriculture (USDA), USAID s ASME and other donor funded activities. The Federation of Agricultural Associations (FAA) was created in 2001 and has received support from multiple donors, including the ASME project, USDA and the Millennium Challenge Account (MCA) Armenia. The FAA currently has 20 membercooperatives and includes an estimated 1,500 household farms. Although there are more than 180 formally registered cooperatives, only a few of them meet the FAA requirements of operating with a social component. 5 This was specifically noted in the dairy sector, where cooperatives function more like limited liability companies. The processor manager operates the facilities with limited involvement from the cooperative due to lack of interest from members. 6 Armenia has a growing greenhouse sector. According to a USAID ASME survey of the greenhouse sector conducted in 2003, 819 greenhouses were identified covering 70 hectares of territory. The majority of greenhouses are small, sole proprietors. Greenhouses producing vegetables and flowers have increased their production and capacity. Fresh vegetables account for 60 percent of greenhouse production with floriculture the remaining 40 percent. 7 The advantage of greenhouse production is a continuous growing season, and the potential efficiencies in growing techniques. The Greenhouse Association has received assistance from 2 FAA interview, confirmed by ACDI/VOCA. 3 Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Ukraine, and Uzbekistan. 4 38th IFAP World Farmers Congress, 1st June, 2008, Warsaw, Poland, Food Safety Requirements and Required Actions.Vardan Hambardzumyan, President, Federation Of Agricultural Associations Union Of Legal Entities (FAA ULE) Armenia. 5 FAA requires that all member cooperatives include an active social component in their organizational structure. [What is the social component? ] 6 Interview with CARD director. 7 USAID/CAPS Assessment of Potential of the Armenian Greenhouse Cluster. January

6 the MCA, USDA, United Methodist Committee on Relief (UMCOR) and Dutch foreign assistance activities. The greenhouses face the same challenges as other producers in agriculture. Holdings are small and fragmented. Primary products are tomatoes, cucumbers, and peppers, but do not meet current domestic demand. Greenhouse production meets only 50 percent of the domestic demand; the remaining demand is met through imports from Turkey and Iran. The structure of Armenia s farm sector is a major constraint. Interviews with USDA, MCA and other actors in the agricultural sector expressed support for strengthening the farm cooperative system. Farm cooperative systems help organize supply, establish standards and can reduce cost through consolidating limited resources for agricultural inputs, such as fertilizers, and leasing of farm equipment. The FAA is the largest and most active farmers organization and has undertaken this role, with support from donors. Armenians do not have a strong cultural affinity for cooperatives given the recent history of the Soviet cooperative farm system. The introduction of a US-type cooperative system has been led by the USDA, however, progress has been slow. Information and education on the benefits of a farm cooperative system is lacking. Armenian farm extension services are weak, as are linkages to tertiary agriculture-related university degrees and research. In addition, the legislative framework is unsupportive; Armenia has no separate law on cooperatives and they are currently covered by a few articles from the Civil Code of the Republic of Armenia. There are multiple donor activities working in the agriculture sector. USDA is the lead donor providing support for primary agriculture. The MCA Water-to-Market activity is providing support for high-value added horticulture products and agro-processors. The MCA activity, being implemented by ACDI/VOCA, is also currently supporting the development of three fresh fruit and vegetable collection centers. These collection centers are being built in Yerevan, Ararat Valley, Armavir, Voyats Dzor, and Parakar 8 (next to the international airport). A. Food Processors Overview: The food processing sector has an historical significance in Armenia; during the Soviet era, Armenia was a primary supplier for agro-processed goods for the entire Soviet Union. However, after independence, the government redistributed land and shifted to a marketbased economy. As a result, many of the value chains that supported the USSR market collapsed. Food processing and linkages to agriculture represent one of the strongest, well-developed value chains in the country, connecting primary agriculture to local retailers and, to a lesser extent, export markets. There are an estimated 20 producers of canned products in Armenia. 9 Sector-specific suppliers and cross cutting providers have an opportunity to link into this chain. This chain is especially valuable given the high share of agriculture in the country s GDP (about 20 percent prior to the current financial crisis), as well as a major share in total employment (47 percent for the last five years before the crisis). 10 Although these proportions may still hold true, the actual sales of food processors, retail stores, and consequently, agricultural producers, has shrunk by an estimated 20 percent as a result of the financial crisis Feasibility study completed in Activity implementation delayed. 9 USAID ASME. Food Distribution Survey National Statistical Service of RA, Statistical Yearbook Consultant s best estimate based on interview with stakeholders. 3

7 Products and production capacity: Armenia produces a limited number of manufactured food products primarily tomato paste, sauces, teas and herbs, juice and juice concentrate, and canned and jarred fruits and vegetables. Table 1. Armenia s Exports and Imports of Agri-food products to EU 15 Most food processors import inputs for food processing, specifically prepared foods and juices. Reasons cited by food processors include the high cost of local supply, and the limited ability of local suppliers to consistently meet quality standards and packaging. A typical frozen food processor company, that has about 30 percent of the domestic market share, buys only 30 percent of its inputs locally, the other 70 percent being imported. This proportion also represents the sale of domestically produced (30 percent) and imported (70 percent) food products in local supermarkets. Sales of locally produced products consist mainly of dairy, meat, and fresh produce, with limited value added. The share of locally produced processed/canned food in total domestic supermarket sales of similar products is percent; this is predominantly due to imported canned mushrooms and olives, which are high value products that make up a large amount of the total sales of canned food. Input suppliers for processed food goods have increased in the last 5-10 years. Currently, ACDI/VOCA works with at least three local wooden box and foldable carton box suppliers. These packaging suppliers support the food processing sector. Several food processors have received Hazard Analysis and Critical Control Points (HACCP) certification, but demand for food safety and quality certificates is lacking in the domestic market. The value chain from farm to supermarket is gaining in strength in large part due to the market pull of the big retail stores. The Star supermarket recently established its own central warehouses and is taking steps to invest in cold chain/storage facilities. Star works with the USAID Center for Agribusiness and Rural Development (CARD) and the MCA Water-to-Market project. Star has also provided assistance to suppliers development of appropriate packaging for local dairy products specifically cheese. The improved packaging has reduced overall costs in the supply chain and improved the shelf life of the products. Market: Food processors are primarily serving the domestic market. An estimated 10-15% of processed foods are exported, 12 primarily to CIS countries and to the Armenian diaspora market. The limited market for these products makes them highly vulnerable to inconsistent purchasing patterns, as demonstrated in the last 12 months during the financial crisis. None of 12 Interview with CARD. 4

8 the food processors interviewed were currently exporting (with the exception of wine and brandy). Processed exports were tomato paste, peaches, grapes, and juice concentrate (fish and dairy are discussed separately). Stakeholders: Supermarkets, input suppliers, packagers, transportation companies, and the FAA. Constraints: The Armenian food processing sector faces constraints meeting both domestic demand and potential export markets. Key among the constraints for the domestic market is the quantity and quality of domestic supply. The lack of structured cold chains is also a major constraint for both markets. It is critical to improve product sophistication and meet export quality standards to expand the export market and to support the growing demand in the tourism sector. Quantity: Armenia has limited economies of scale for agricultural inputs for food processing due to fragmentation and small land holdings. Multiple small suppliers are difficult to organize to provide required quantities of similar quality and require costly tracking systems for product traceability. This increases the overall cost of the primary products. These factors have a direct impact on cost competitiveness. Quality issues: On average, Star rejects percent of fresh produce due to poor quality. Suppliers cannot meet quality standards (note Armenian fresh produce quality standards are well below export standards). Star has worked with suppliers to provide them with appropriate crates and handling materials to improve the handling of produce and reduce losses between harvests to market. Weak cold chains: A cold chain from farm to end market is required in order to reduce losses due to spoilage. In this regard, producers and retail companies have developed internal and often fragmented systems. Probably the most developed is the Star supermarket cold chain. Star has a centralized distribution system and works closely with local suppliers. Star recently invested in leasing four new refrigerated trucks with loading dock capacity, which has reduced the time and labor required for loading and un-loading, and resulted in a significant reduction in fresh produce loss due to quality concerns. Small producers that own their own transportation have added thermal coolers to vans and other trucks. The preference in the market, even for small producers, is to invest in their own transport rather than to rely on the outsourcing of these services. 13 Food Safety and Certifications: Certification is not a concern for locally sold food products, but it is a major constraint for exporters. Armenia has a limited number of firms with production certifications. According to the World Bank Enterprise Survey, only 5.7 percent of Armenian firms possess such a certification; this is noticeably lower than all comparison countries, including Turkey (12.6), Georgia (16.0), and Azerbaijan (10.3). 14 Armenia has limited food safety testing facilities for HACCP and International Standards Organization (ISO) requirements. University laboratories are not sufficient for advanced testing and no private sector facilities for advanced testing were identified during this assessment. 13 USAID. MEASURE Armenia: The Enterprise Development Diagnostic for USAID/Armenia. Business Growth Initiative. September Ibid. 5

9 A lack of government oversight in the application of existing food safety standards is of concern. Regular inspections do not take place, and there has been a limited capacity to undertake them, presumably due to a lack of political will to move forward. The ASME project worked closely with the Ministry of Agriculture provided and detailed recommendations to strengthen the current system including: the development of direct assistance to food companies, including the setup of laboratories, ISO and HACCP training, food safety education, improved sanitation, assistance with labeling, training courses, etc.; build the capacity of educational and private sector support organizations, so that they can provide better developed seminars and training, development of food science programs, curricula for food safety workshops and a Master s degree program, set-up of laboratories, expansion of agricultural extension services, facilitation of academic exchange programs, technical assistance to consultants, etc.; and building of governmental infrastructure, including assistance with diagnostic animal testing laboratories, training, thorough water analysis study, provision of EU standards and regulations, etc. 15 It is unclear if any elements of this program were implemented under the ASME activity. Comments provided by the former project staff indicate that the Ministry of Agriculture was not supportive of a comprehensive program and that very few, if any, of these recommendations were implemented. The CARD 2007 Annual Report cites that the National Food Safety Concept by the Ministry of Agriculture was in the approval process at that time (it is unclear if it has been approved now). The Concept seeks to address the following issues: legal and regulatory framework, risk analysis, HACCP-based food safety management, consumer awareness, capacity building and training, and testing laboratories. 16 Donor Activities: The development of the three consolidation centers supported by the MCA in the Water-to-Market project, in addition to farmer and processor training, seeks to address both quality and quantity issues in the horticulture value chain. Star had plans to participate in the activity as a private sector partner, however, withdrew from providing financial support due to the impact of the financial crisis. CARD is an HACCP certified trainer and provides support to targeted food processors, primarily in the dairy and meat sectors. CARD also has limited laboratory facilities for basic food safety testing. USDA has also worked in collaboration with the Armenia Agricultural Academy and the University of Texas A&M to create a Master s degree program and further develop the capacity of the research center. B. Cut Flowers Overview: The fresh flower sector received support under the USAID ASME activity, which helped to organize supply, identify markets, and identify supply constraints. Export potential is considered high, based on a market assessment performed by the ASME activity. There are 12 large producers supplying a robust and large domestic market, primarily through greenhouse 15 USAID ASME. Design of SPS Food Safety Project for Armenia USDA CARD. Accomplishment Report

10 growing techniques. 17 The sector represents a small part of the agriculture economy and has experienced low growth rates in recent years. The low growth rates are attributed to the saturated domestic market and market barrier for exports, specifically Armenia s noncompliance with members of the International Union for the Protection of New Varieties of Plants (UPOV). In May 2009 Armenia initiated procedures for membership in the UPOV. 18 Products and production capacity: Armenia has earned an international reputation for high quality flowers. This can be attributed in part to the ambient condition in Armenia; high light intensity and 330 days of sunshine a year, matched with excellent volcanic soil containing abundant micro-elements as well as trained and experienced agronomists. Sixty percent of local greenhouses are specialized in vegetable growing and 40 percent in floriculture (cut flowers). Average productivity per square meters of vegetable-growing greenhouses is estimated at 10 kilograms during the whole season. Average productivity per square meters of flower-growing greenhouses is estimated at 100 cut flowers during the whole season. 19 The vast majority of chemicals and fertilizers used in cultivation of greenhouse products (flowers and vegetables) are imported. The import process is facilitated by the Greenhouse Association. Market: Armenia has a considerable and demanding domestic market. Armenian producers have historically sought to meet domestic demand first, often times at the expense of the export market. Armenia does have limited experience of flower exports to Georgia, Russia and the EU. Market surveys and a production assessment conducted in 2001 under the ASME project indicated that demand in the Russian market was growing and that the market had an affinity for Armenian flowers. 20 Other potential markets include Turkey and Iran. The length of the carnation s stem is the prime determinant of price, and if properly packed and exported, can obtain up to 50 percent more than domestically. Local greenhouses can produce about 28 million pieces of cut flowers. Given the average market price of a cut flower equaling 250 Armenia drams (AMD), it is estimated that the size of the domestic market exceeds US$20 million. The major share of the market belongs to roses and carnations, which comprise about 80 percent of domestic market demand. 21 Stakeholders: FAA and the Greenhouse Association of Armenia. Constraints: The main issues impeding the export of Armenian flowers to foreign markets (mainly CIS countries) are insufficient volumes for export, inadequate packaging and transportation and logistics. Armenia s pending membership to the UPOV will help to alleviate previous barriers to the EU market. However, most critical is that the current supply of cut flowers only meets domestic demand. Without increased production, and a targeted export strategy, continuous access to the export market is unlikely. In the past when fresh flowers were exported, the prices on the domestic market rose. Exports were then diverted to the domestic 17 FAA interview. 18 UPOV download and Ibid. Intellectual property rights for flower breeders (the rights to collect royalties on the sale of patented varieties of roses and other flower species) is protected under an international agreement called UPOV. Armenia is not yet a signatory to this agreement. 19 Ibid. 20 Cut Flower Perspectives Development of Armenian flower market development of cut flower exports USAID ASME, DAI 21 USAID/CAPS. Assessment of Potential of the Armenian Greenhouse Cluster. January

11 market. The cut flower sector requires specific export packaging for gerberas to protect the flower bulb. Transportation was not cited as a major constraint due to the limited number of exports; however, given the reduction in the number of flights to CIS countries resulting from the economic crisis, this may be an issue when identifying export market access. Donor Activities: The fresh cut flower sector has received support from the USAID ASME project and the Dutch project (which ended in 2006). Currently the sector receives support through the Water to Market activity specifically related to greenhouse production; however, cut flowers are not a target sector for this activity. The ASME project produced various reports and market surveys to support the sector; however, Armenia s non-participation in the UPOV appears to have been a major constraint for additional sector support at the time. C. Dairy and Cheese Overview: Armenia has a long tradition of high quality dairy and cheese products. Like food processing, Armenia was a producer and exporter of high quality dairy, yogurt and cheese during the Soviet era. The geography of Armenia is particularly suited to the development of specialty cheeses. Products and production capacity: Today, 95 percent of the cheese varieties in the Armenian domestic market have been developed utilizing USDA expertise. More than twenty-two different varieties such as Emmental, Blue, Smoked, String, Holland, Edam, Tom, and others have been 22, 23 developed and exported. Privatization and decentralization fragmented the dairy sector in the 1990s. Support by the USDA, EU and other donors have helped the sector to organize into cooperatives. The dairy industry is Armenia s largest agricultural sector with 55 percent of Armenia s 335,000 farmers owning 262,000 dairy cows, approximately 500,000 sheep, and more than 50,000 goats. 24 There are an estimated 38 milk processing facilities and almost 30 cooperatives. 25 The USAID ASME Food Distribution Survey classified the market into three groups: 1. Large scale producers: for example, Ashtarak Kat CJSC which takes up around 40 percent 26 of the market; 2. Medium scale producers: there are 7-8 such producers, who together make up around percent of the market; and 3. Small scale producers: there are such producers, who together make up percent of the market. 27 In recent years the dairy industry has again started to grow through private investment. There is significant and growing domestic demand for dairy products and regional demand for Armenian cheese, particularly within the Russian Federation Unlocking the Export Potential of Armenia s Landlocked Dairy Sector, CARD. 23 USDA-MAP, Developing the Food Supply Chain in Armenia, Jeffery Engles, CARD. 25 Note this estimate cited in several sources documents is not consistent with the estimate of CARD of around Market volumes were calculated based on processing company's production volumes and do not include dairy products sold in the market by individual farmers. 27 USAID Food Distribution Survey Hambardzumyan, Vardan. President Federation of Agricultural Associations Union of Legal Entities (FAA ULE) Armenia. Food Safety Requirements nd Required Actions. 38 TH IFAP World Farmers Congress, 1st June, 2008, Warsaw, Poland. 8

12 It is believed that many dairy processors are not working to full capacity. One small dairy processor, based in Gymri, is only producing 200 tons/year; however it has the capacity to produce 1,500 tons. Current economic conditions have resulted in reduced demand. In addition, milk processors have recently come under criticism for using milk powder as an additive. 29 Market: The dairy sector is strongly represented in the domestic market with 80 percent of products sold to Yerevan. Exports to Georgia and Russia and other CIS countries are limited and unstable. The ideal target market is the EU; however strict food safety and Sanitary and Phyto-Sanitary (SPS) requirements prohibit access to this market at this time. Employment: The average dairy processor employs 20 people. A mid-size dairy processor may work with over 600 small farmers each with an average herd size of six cows. Dairy is not the only source of income for most farmers. Farmers work on a contract basis with processors; many of these contract relationships date back to pre-independence. Stakeholders: The local retail market, individual small farmers, and dairy cooperatives. The Association of Development of Milk Production consumers cooperative was founded in The Association is a non-governmental, organization that unites farmers cooperating with Ashtarak-Kat CJSC in the dairy industry. CARD is a local NGO and has provided extensive support to the dairy sector. Constraints: The dairy sector constraints are similar to other agricultural related value chains. Specific issues addressed below include the quality control of the milk supply, food safety standards, international certifications and cold chain development. Multiple small farmers providing milk to dairy processors can result in a wide variance of quality. Contributing to the challenge of standardization is the historically weak domestic demand for products of consistent and high quality. Vardan E. Urutyan, Ph.D., Deputy Director of the International Center for Agribusiness Research and Education Foundation recently said: One dairy processor said during our interview, Right now I have 40 tons of Lori cheese sitting in storage, and each cheese block I cut has different taste: how I can satisfy the customer, who requires stable and consistent quality? This lack of uniform quality, combined with the fractured nature of the production base, makes it very difficult for distributors to collect cheese in commercial quantities for domestic or export sales (World Bank, 2005). 30 Small farmers often lack the necessary cooling facilities and practice poor farm sanitation techniques. This has a direct impact on the quality and safety of the milk being provided to processors. This problem is being addressed through CARD s support of small processors and the introduction of a milk collection and cooling center through a cooperative model (see the agriculture sector assessment). Impact of current economic conditions: Farmers and livestock breeders are experiencing increased costs for agricultural inputs and decreased income due to lower demand. Investing in this year s agricultural season will be difficult as credit and remittances are also reduced. Particularly vulnerable are small-scale farmers and livestock breeders in low-production zones 29 Armenian dairy-makers obliged to indicate milk powder presence in products. 19/09/ Urutyan, Vardan E. The Role of Producer-Owned Cooperatives in Dairy Supply Chain: Evidence from Armenia. XXII International Co-operatives Research Conference: The Cooperative Response to Civil Society's New Expectations 19 th - 22 nd October, 2006 Paris/Dourdan, France

13 in higher altitudes who often combine agriculture with seasonal labor migration. They are coping by selling off their few productive assets, in particular livestock, hampering their recovery potential. 31 Donor Activities: USDA CARD offers the most advanced food safety training and resources in Armenia. CARD can provide HACCP certification, but has limited laboratory facilities. CARD offers a variety of services including import sourcing for new technology, and goat and bull semen. Through their daughter agency, AgroCredit, CARD provides lower-than-marketrates, lending for inputs and leasing terms for equipment. Pasteurization technology was imported from Denmark, Sweden and the USDA CARD has also provided the dairy sector with support for the development of appropriate packaging. D. Fish and Fish Processing Overview: The fish industry represented less than 0.1 percent of the GDP and total employment, but constituted 0.4 percent of all exports in With a capacity to produce more than 300,000 tons of fish and related products annually, the sector currently produces 12,000-16,000 tons. Caviar production is currently 2,000 tons per annum, with a capacity of expanding to 15,000-20,000 tons. This is an attractive sector not only because of high external demand for such products but also because of a high profit margin (25 percent for fish and up to 40 percent for caviar), and land efficiency (output per square meters of land). Products and production capacity: Products are trout, sturgeon, and caviar (fresh, frozen, smoked, and canned). The domestic market is relatively small. Frozen and canned fish consumption is approximately 3 kilograms/per capita/per year a low figure due to the limited purchasing power. Currently only five members of the Fish and Frozen Fish Association are HACCP certified; however the Association feels that 90 percent are HACCP ready. Fish farms have a natural advantage over competitors in Chile, Norway, Denmark, and Scotland. Pools are spring fed, which means that the water remains at the optimal temperature year round, thus requiring no additional inputs or a break in the production cycle. Due to the better quality of water, the amount of antibiotics and other elements in the fish food is reduced and the quality of fish is better than those raised in seas. Opportunity for hub-and-spoke-like integration is possible so that smaller producers can benefit from export potential and contribute to the provision of required quantity and quality for export. Market: Russia and Ukraine were the primary export markets prior to the financial crisis. Potential fish and caviar markets include Georgia, Iran and Kazakhstan. Exports to Russia have decreased and are not regular due in part to the current economic conditions. If required laboratory facilities and certification were available, exports could be expanded to the EU market. The US market is actually more affordable as no pre-export certification and standard requirements exist; however, the cost of transportation and potential loss of product are too high a risk. Employment: Currently about 2,000 individuals are employed in this sector with a potential for 15,000 new positions if export markets were expanded Executive Brief Armenia Effects of the Financial Crisis on Vulnerable Households, World Food Programme. 26 May National Statistical Service of Armenia, Statistical Yearbook Reported by the President of the Fish Farmers Union of Armenia. 10

14 Stakeholders: The Fish Farmers Union of Armenia has strong and experienced leadership. Recently the Prime Minister approved support for a sector strategy. Constraints: The fish and frozen fish sector faces many of the same constraints as the dairy, meat and food processor sectors, specifically the lack of a cold chain, centralized collection center and a lack of capacity to meet international food safety standards required for the EU market. Food Safety and Sanitation: Armenia lacks the laboratory and testing facilities necessary to meet the SPS requirements for exports to the EU. Currently testing is done at facilities in Europe for samples only. Laboratory and certification facilities are costly and are not attractive investments without solid prospects for export. Private sector investment in a facility is costly without a secure export market (see previous sections for additional information). Cold Chain: Fish processors face the same cold chain constraints as related agricultural value chains. Many fish farmers use vans or trucks with coolers for refrigeration. No examples were provided of fish farmers employing commercial refrigeration trucks; this is likely due to the small volume of productions. Land Development: The Armenian legal code requires that land used for processing and fish farms needs to be re-classified to be used as collateral. This is very costly and does not guarantee that banks will accept the land as sufficient collateral. The reclassification of land is unique to fish farming. Land used for traditional sub-sectors of the agricultural sector does not require reclassification. Lack of financial products, including ex-factoring, and loan guarantees: These constraints are specifically addressed in the SME access to finance assessment done in conjunction with this assessment. E. Dried Foods Overview: Dried fruits and vegetables have a long tradition in Armenia and the region; however this sector was not supported by the Soviet Union. More recently the sector received support from the USAID ASME project. An Association of Dried Food Producers was established in 2003, of which there are 52 members, representing processors, farmers and other industry stakeholders. The association is working with a French diaspora group to receive an investment/grant of 10,000 for a new packaging machine. Solar drying technology was developed and introduced in the late 1990s. The introduction of solar drying technology helped re-establish this traditional sector. Solar dryers are a very simple technology that can be built from local materials, making dried fruit an attractive sector in the rural economy, particularly for women. Fruit drying is a traditional subsistence activity in rural communities practiced by women. The dried fruit sector has made limited gains since the ASME project support ended. The sector relies on grants, government support and limited donor assistance. Private sector investment in the sector for the development of consolidation centers, laboratory testing and other business services is not being pursued by the association, presumably due to the limited economies of 11

15 scale and high cost. The association pursues grants and donor support for activities and does not charge members for services. Products and production capacity: Currently, 2,000 tons of dried fruit are sold locally per annum, of which 1,000 tons are grapes. Only 80 tons (4 percent) are imported, compared to more than 71 percent imported at the beginning of the 1990s. 34 Market: Currently there are no dried fruit exports. All products are sold in the local market and to local retailers, including Star. Armenia faces competition from Turkey in dried apricots and from Iran in grapes, and lacks economies of scale for large sales. Three years ago, 30 tons of dried tomatoes were exported to France. While further exports have not been repeated, the French market is considered an opportunity and the association is currently focused on building a market for a special variety of tomato for the French market. 35 Employment: The average number of employees for a processor is 10, predominately women. Processors are typically small family businesses and use multiple suppliers. Employment opportunities for this sector are limited. In addition, the market growth potential is uncertain, with jobs more likely providing supportive income to other full-time employment. Stakeholders: Small farmers, the Association of Dried Fruit Producers of Armenia, dried fruit processors, supermarket chains. Constraints: Supply is limited; economies of scale cannot be reached given the current structure of agricultural holdings. Quality is low and cannot compete with other regional varieties from Turkey and Iran. This sector also suffers from a lack of laboratory service for quality control. Currently, the Association provides free testing on a case by case basis and has no plans in commercializing support activities. The association lacks a commercialization strategy/outlook and is supported through government programs and by donor assistance. Due to strong regional competition, the sector is unlikely to develop without a more demand driven focus. Donor Activities: In addition to support by the ASME project, the sector received support from CARD as recently as 2007, with the development and introduction of new drying facilities. The association has sent a proposal to the Prime Minister requesting a grant as an anti-crisis measure due to the economic situation. F. Wine and Brandy Overview: Armenia has a well developed brandy and wine sector. Armenian brandy is recognized worldwide for its quality and contributes significantly to exports, making up 80 percent of the processed food export market. There are 50 registered producers of wine and brandy, of which 41 are members of the Wine Producers Association. The Association has a relationship with the largest producer (a non-member) and combined cover 90 percent of the market. Currently 31 members are exporting. Products and production capacity: There is a very strong link between the wine and brandy sector and primary agriculture. Approximately 90 percent of the grapes produced in the country 34 Interview with the President of the Association of Dried Fruit Producers of Armenia. 35 Ibid. 12

16 go to brandy production. Currently 350 out of 900 rural areas can produce grapes for wine and brandy production, but only 30 percent of the production capacity is being used. Market: Armenia exports mainly to Russia, other CIS countries, the US and EU. Of current productions, 50 percent of brandy and 10 percent of wine is exported. Of this, 93 percent of brandy exports and 70 percent of wine exports go to Russia and other CIS countries. Brandy exports target some non-diaspora markets, whereas wine is predominantly exported to diaspora destinations. The Armenian brandy brands are better known than wine. Unlike brandy, Armenian wine is considered inferior to other regional wine due to poor and inconsistent quality. The demand for brandy exports has shrunk 70 percent in the last 12 months due to the economic crisis. Brandy is a higher-end niche product. As sales have fallen due to the economic crisis, buyers with limited capacity seek out higher quality. As a result, diluted or false products on the market have recently been driven out. The shift in trends from classical wines toward more exotic types produced by South Africa, New Zealand, Australia, Argentina, and Chile support the market development for more unique and indigenous branding. Armenia has the long-term capacity to be competitive in this regard. However, a business-friendly environment is required to promote Armenian wines and brandies, targeted at non-diaspora markets. The Wine Producers Association has a long-term strategy for developing regional branding and certification of Armenian wine. The framework for this certification was recently approved by the government and is part of a long-term strategy to strengthen Armenian wine exports. Employment: Between 30 and 35 members of the Association are SMEs, and have employees. Others are bigger companies employing more than 200 people. Stakeholders: Wine Makers Association, grape growers. Constraints: While Armenian brandy is very well known in both the region and throughout the world, this is not the case for Armenian wine. Wine exports are heavily dependent on diaspora markets who buy these products mostly because of their origin. In the case of wine, focusing on a limited and distinctive market does not create incentives for producers to develop a competitive marketing strategy and compete on cost/quality. As a result, Armenian wines are considered inferior to other regional varieties most notably Georgian wines. Armenian wines are generally not of high quality, both for a series of technical reasons and because local demand is not very discerning. Competing on cost is not an option, as the relative cost structures of wine production in places like Chile and California are very competitive. Armenia s only hope in developing its wine industry is a complete overhaul from top to bottom. It is estimated that it will take 10 to 15 years for the industry to change and become internationally competitive, 36 and would involve completely changing farmers attitudes, including introducing new varieties. The approximately 30 wineries would have to learn new hygienic procedures and invest in new equipment. Sources of proper wine yeast would also have to be obtained and used properly Competitiveness Assessment. 37 Ibid. 13

17 Producers also face challenges in the quality of grapes received. Poor post-harvest handling and transportation can result in a 50 percent loss of grapes adding to the cost. As a result, Armenian wine can be twice as expensive as some imports in Yerevan restaurants. Donor Activities: The MCA Water to Market project is providing general support to the agriculture sector to improve irrigation and production efficiencies and post-harvest handling techniques. While not specifically targeting grapes, some producers are benefiting. The International Fund for Agricultural Development (IFAD) has previously provided support, but the activity is now closed. The sector continues to receive direct support from CARD through the establishment of new vineyards, increasing grape yields, packaging and marketing, and legislative support. G. Textiles and Apparel Overview: Armenia was a major supplier of garments and textiles during the Soviet Union. The industry employed an estimated 115,000 people, and accounted for percent of the country s work force during the 1980s. By 2002, it had declined to less than 1 percent. By 2003, the total number of employees was not more than 2,300. Of the 130 registered apparel firms, only about 50 are operational. Five of these are large companies and 45 are SMEs. 38 Products and production capacity: The textile industry produces finished garments, and a limited amount of knit fabric, primarily for the wholesale domestic market. Finished garments are primarily knit products, children s clothes and undergarments. Manufacturers do not use advanced technologies in production due primarily to the low level of the product sophistication. Armenia s competitive advantage is its low cost of labor and energy. The industry was operating at about 38 percent of capacity in 2002 and represented about 0.3 percent of GDP. Over 95 percent of all inputs are imported. Only the thread could be produced locally at a more cost effective rate. However, currently thread produced locally is of poor quality and is manufactured on out-of-date machines. Market: Exports grew by 18 percent to total approximately $28.7 million in Meanwhile, imports had slightly declined (1 percent) and amounted to $35.6 million in Between 90 and 95 percent of total production is exported. 39 It is estimated that the market contracted about 70 percent this year, however, orders have recently picked up. 40 Increased competition from Turkey is of concern. Employment: Textile manufacturing is one of the most labor-intensive industries in Armenia. The majority of plants currently employ more than 300 workers on average; approximately 90 percent are female employees. 41 Yet, some of these big enterprises often work at percent of capacity, underutilizing both their equipment and space. 42 According to the Armenian Apparel and Textile Industry Business Information Center, 43 there were 154 registered companies, the majority of which are large companies employing more than 300 employees (small companies make a very small proportion). According to the same source, the number of employees can triple in the near future, the rough estimate is approximately 138, Ibid. 39 Ibid. 40 Interview with JMB garments. 41 Pre crisis data Ibid. 14

18 Constraints: The textile sector relies on imports for production and manufacturing. Primary constraints are issues related to customs and tax administration. The issue of value-added tax payback is a common issue across sectors, but it is to a greater extent applicable to industries which are heavily reliant on imports and export for most of their products. A textile company in Gyumri imports up to 95 percent of its inputs and exports 90 percent of its products. The sector engages in very limited marketing efforts and demonstrates weak levels of business sophistication. The sector engages in limited investment in new technology, production management systems and human resources development. Donor Activities: The textile and apparel sector benefited from technical assistance from the ASME project in the past. II. Sector Summaries This section provides brief summaries for additional value chains identified for consideration but not pursued by this rapid assessment given limited access to both primary and secondary sources and time constraints. A. Clean technology The assessment team met with the Chief of Party (COP) of the USAID Center for Evaluation and Education Policy (CEEP) project to discuss potential opportunities for the development of a clean technology and renewable energy sector in Armenia. Armenia does not lack energy resources. Nuclear power plants, non-renewable, and new hydro power facilities provide Armenia with enough energy to meet current demand. In addition, Armenia has the potential to export energy to the region. However Armenia s energy sector is not well organized as an industry. An Association of Energy Service Companies exists, but represents a limited number of stakeholders in the sector. The seven members are medium to large size firms. 45 Currently no private sector firm exists that can assess business plans for renewable energy activities and projects. 46 Banks currently rely on the services of the CEEP project for technical assistance in reviewing loan applications for conservation to renewable energy activities. In addition, the majority of consultant services for renewable energy activities are provided directly by the CEEP project. While there are potential linkages to the development of the high technology sector, Armenia appears to lack three fundamental elements for a clean technology sector: a) lack of basic information on the benefits of renewable energy sources and their application; b) lack of government incentives for the development and application of renewable technology; and c) lack of education and training facilities to support workforce development and new equipment. B. Meat and meat processing The assessment team reviewed secondary source documents on the status of the Armenian meat and meat processing sector and met with CARD to discuss USDA support for this sector. The sector was not included in the rapid value chain assessment due to the limited size of the sector, high cost of domestic production, the overwhelming constraints regarding appropriate animal breeding, health as well as very limited application of sanitary and professional farm and Interview with USAID CEEP COP. 15